3 Income Stocks That Passed Our '2-Minute Test'

We all know the value of investing in dividend stocks. That's why I was intrigued by StreetAuthority expert Amy Calistri's unorthodox idea about investing in stocks with low dividend yields.

Her point: Lower-yielding stocks can outperform their higher-yielding counterparts.

Amy's not saying that all low dividend yield stocks were identical. In fact, she provided a four-step test for screening prospects to determine a stock's dividend track record, ensuring it had a low payout ratio and high revenue growth, as well as a compelling story for future growth.

I ended up with three stocks I could confidently rate good, better and best. Here's how I got there.

I was expecting quite a few would survive the first test of paying and increasing dividends, and I wasn't disappointed. I found 726 possible names on, which had a record of at least five years of increasing dividends.

To add my own stamp to the process, I fiddled with the ratings screener. When I moved the rating screen to 3 or better (out of 5), the list shrank to 547 entries. Moving it to the top rating screen of 5 chopped the list to only 10 names. I was in business with a manageable group.

But because I was being picky about only finding top-rated stocks, I decided to add another hurdle before continuing the test. I took the remaining 10 top-rated stocks, matched up "years paying" and "years increasing," and threw out any company that hadn't increased each year. Any missteps, and they were out -- which was how Caterpillar ( CAT ) and Monmouth Real Estate ( MNR ) dropped off the list.

Although I was only looking for companies with five or more years of increasing dividends, the only remaining stocks had been paying for 20 years or more.

Low Payout Ratio

I tossed out any stock that had a payout ratio more than 100%, which was why I bid farewell to Harsco ( HSC ) , Kinder Morgan ( KMI ) and Landauer ( LDR ) .

With the first two screens of Amy's test completed -- plus my added criteria of isolating only the highest-rated stocks boasting a perfect record of increasing dividends -- I had five contenders: Clorox (CLX) , Hawaiian Electric (HE) , Kaydon (KDN) , Leggett & Platt (LEG) and Raytheon (RTN) .

For revenue growth, I used the five-year growth rate. A negative five-year revenue growth rate of minus 2.6% eliminated Leggett & Platt despite its positive net income growth rate of 32.9%.

Revenue Growth

The concept of future growth starts to get into subjective territory, but I decided it was fair to add two more numeric screens to be sure I was looking at the best of the best. First, I screened for net income growth rate over the same period and decided Kaydon's minus 62.3% was a red flag, so my list shrank to three.

My next screen caused no further concern because all three remaining stocks had low price-to-earnings (P/E) ratios.

At this point, I decided to rank the data I had for the remaining stocks for each metric. With one being best, this meant the stock with the lowest total score would be the best.

The final test would determine whether the case for future growth matched up with the ranking.

Future Growth

Clorox was in the news earlier this year for its worse-than-expected profit decline in its fiscal third quarter and shrinking margins. The company recently said it expects sales growth of 2% to 4% next year, and Clorox has been trading near its one-year high near $90. I see neither spectacular growth in its future nor a great bargain.

Raytheon recently reported higher second-quarter profits and beat analysts' EPS estimates. the company also raised its full-year forecasts for this year and next, saying it expects EPS of between $5.51 and $5.61. Like Clorox, Raytheon is trading near its 52-week high, so it's not a bargain at its current price.

With a market cap of $2.6 billion, Hawaiian Electric is the smallest company of the group. It's also much less diversified, with its fortunes tied, not surprisingly, to those of Hawaii. The company supplies 95% of the islands' electricity through its electrical utilities division, which accounts for about two-thirds of Hawaiian's revenue. Hawaiian's banking division -- which is one of the state's largest and accounts for the remaining third of the company's revenue -- has dramatically expanded its mortgage business and reported higher net income in its most recent quarter. The stock is currently a bargain as it's trading near the midpoint of its 52-week range.

Risks to Consider: Companies can change their dividend policies at any time, and it bears repeating that past performance is not an indication of future results. Both Raytheon and Hawaiian Electric are heavily dependent on single sectors, defense for Raytheon and the Hawaiian economy for Hawaiian Electric. Hawaiian Electric will also likely move in response to its Aug. 8 earnings report.

Action to Take --> Between Raytheon and Hawaiian Electric, I think I give the edge to Hawaiian Electric for its higher revenue growth and dividend yield. Hawaiian Electric also provides a relative bargain entry point, trading now at $27 compared with its 52-week high near $29. In Raytheon's favor, I don't see the defense sector shrinking, but with the number of retiring baby boomers on the rise, Hawaii is primed to continue to be a growth region. Plus, imagine the fun of going to visit your "investment."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

© Copyright 2001-2016 StreetAuthority, LLC. All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics

Investing Stocks

Latest Markets Videos

    Street Authority

    Founded in 2001 by industry veterans, StreetAuthority is a financial research and publishing division of Investing Daily. Our mission is to help individual investors earn above-average profits by providing a source of independent, unbiased — and most of all, profitable — investing ideas. Unlike traditional publishers, StreetAuthority doesn’t simply regurgitate the latest stock market news. Instead, we provide in-depth research, plus specific investment ideas and immediate action to take based on the latest market events.

    Learn More